The proposed combination of Britain's largest defence contractor and the Franco-German owner of Airbus would have created a pan-European manufacturing powerhouse with 220,000 employees, making hi-tech products ranging from nuclear submarines and Typhoon fighter jets to the A380 superjumbo.

"It [Merkel's opposition] was a key factor in the decision to terminate the talks," said the source. Another added that Merkel appeared to be "philosophically opposed" to combining a defence business with a civil aerospace company. "The fundamental problem is that Merkel does not feel comfortable with the deal, full stop."

France, which controlled 15% of EADS directly, was unhappy with German demands for the business to have its headquarters in Munich, while Germany was concerned that France could end up with a bigger shareholding in the new business than the 9% it was seeking.

The UK, in turn, refused to allow German and French political representatives to sit on the BAE board, as would have been likely under the dual-listed structure envisaged by both companies.

Nearly 20% of the electorate voted for the National Front, the party of the extreme right. To add insult to injury, many young voters supported the party's candidate, Marine Le Pen. Youth is supposed to be synonymous with hope. With the rise of unemployment and the decline of belief in the value of the European Union, it seems young people, especially poorly educated ones, are motivated by fear much more than by hope.

Hollande is a Social Democrat; he does not have the means to be a revolutionary. As for Europe, Hollande in power in France would merely be an accelerating factor in the slow evolution of the EU away from a strict austerity policy, which the Germans themselves have started to question.

Hollande is keen to stress his fiscal prudence. His manifesto calls for higher taxes on banks, big firms and the rich to help cut the public deficit while pumping more funds into education and job creation.

He also wants to cap executive pay, create a financial transaction tax and separate banks' retail and investment arms.

He launched his campaign by declaring that Big Finance was his real adversary and should pay for the global financial crisis, and he has called for a 75 percent top tax rate on income above 1 million euros a year.

France is home to around 500,000 citizens of Armenian descent and they are seen as a key source of support for Sarkozy and the UMP ahead of presidential and legislative elections in April and June next year.

The Organisation for Security and Co-operation in Europe (OSCE) issued a statement of concern about the French vote setting a precedent and warned that the "criminalisation of debates on history's true course, even of obviously false and offensive statements about a nation's tragic moment, is not conducive to better understanding" among people and states.

Franco-Turkish relations are often tense - Sarkozy is a firm opponent of allowing Turkey to join the European Union - but 1,000 French firms work there and trade between the two is worth 12 billion euros per year.

Much of Europe, including France, is facing recession amid a sovereign debt crisis, but Turkey enjoys growth rates in excess of eight percent and, with 78 million people, it is a huge potential market.

This latest decline in Sarkozy's popularity means he has surpassed his predecessor Jacques Chirac's lowest score of 27 percent. However, he still has some way to go before hitting the all time record low of 22 percent registered by former Socialist president, Francois Mitterrand.

"More than ever, Germany and France are determined to talk with one voice, to adopt common policies, to give Europe the means to met its legitimate ambitions," Sarkozy told reporters at a joint news conference with Merkel.

"So (we will have) economic governance at the level of the 27 (member states) and in the event of necessity, there'll be meetings concerning euro problems within the euro zone."

Merkel stressed that government by the 27 was particularly important to her and that measures aimed at punishing budgetary sinners in the euro zone needed to be ramped up.

"We need a strengthening of the (EU) Stability and Growth pact. We also agree that we need to consider changes to the (EU) treaties," Merkel said, noting that Germany and France would submit proposals on this matter soon.

"One point here could involve withdrawing voting rights for notorious sinners in the euro zone, which seems important to us, because we really need treaties with bite to make this stability and growth culture work," she added.

He called on world and regional financial bodies to finance new nuclear projects in developing countries, and announced that France would set up an international institute to promote atomic technology.

"I can't understand why nuclear power is ostracised by international finance, it's the stuff of scandal," he said, urging the World Bank, the European Bank for Reconstruction and Development and others to do more.

French engineering giants Areva and EDF are promoting the European Pressurised Reactor (EPR), a third-generation reactor design that France considers the most advanced in the world.

But the French firms recently lost out on a 20 billion dollar (14 billion euro) contract to supply four reactors to the United Arab Emirates after South Korean firm Kepco came in with a lower offer.

"Today, the market only ranks designs on the basis of price," Sarkozy complained, calling on the United Nations' International Atomic Energy Agency to establish a classification system to rate reactor safety.

French President Nicolas Sarkozy admitted Thursday at a joint press conference in Kigali with his Rwandan counterpart, Paul Kagame, that France had made “mistakes” at the time of the 1994 Rwandan genocide, in which 800,000 people, mainly from Kagame's Tutsi minority, were killed.

"What happened here is unacceptable, [and] compels the international community, including France, to reflect on the mistakes that stopped it from preventing and halting this abominable crime," the French president told reporters.

Sarkozy also acknowledged “mistakes in Operation Turquoise, which stepped in when it was too little, too late,” referring to a June 1994 French military operation launched two months after the genocide began with the intent of halting the massacres.

The French president, however, stopped short of voicing an apology. Suggesting neither country should “remain hostage of the past”, Sarkozy said he wanted to “move past this very tragic chapter” and stressed the importance of “building a new partnership”.

Two years ago, Sarkozy already spoke of "failings” and “errors". But his entourage predicted before his trip to Kigali that he would not go as far as Belgium and the United States, who have both presented an apology.

The soured relations between the two countries hit a low ebb in late 2006 when Rwanda decided to sever diplomatic ties with France after a French judge questioned Kagame’s involvement in the death of Habyarimana.

Rwanda responded by releasing a report accusing around 30 senior French political and military figures of complicity in the genocide. A series of rulings by the French legal system eventually reassured Kigali.

French President Nicolas Sarkozy backed the creation of a "viable" Palestinian state on Monday but was cautious about repeating his foreign minister's support for possible recognition of a state before its borders were set.

In a newspaper interview at the weekend, Foreign Minister Bernard Kouchner said that to break a stalemate in Middle East peacemaking, some countries might recognise a Palestinian state before its borders were fixed.

"One can imagine a Palestinian state being rapidly declared and immediately recognised by the international community, even before negotiating its borders. I would be tempted by that," he told the Journal du Dimanche.

Sarkozy said that Kouchner was thinking of possible ways to bring momentum to the peace process but that France's goal remained a functioning Palestinian state in clearly set borders.

"In Bernard's comments, there was the thought that if we don't manage that, then when the time comes, in accord with our Palestinian friends, we might underline the idea of this state politically, to lift it up a notch in a way," he said.

"But the objective is the idea of a Palestinian state in the frontiers of 1967, with an exchange of territory, just as we have said all along."

The Ramallah-based Palestinian leadership said last year it would seek U.N. Security Council backing for a Palestinian state based on 1967 borders, referring to the West Bank and Gaza Strip borders as they were on the eve of the 1967 Middle East war.

It said the initiative would not be a unilateral declaration of statehood but would aim to secure international support for the eventual creation of a state based on the 1967 borders.

A think-tank close to the Israeli government says the Palestinians "have largely abandoned a negotiated settlement and instead are actively pursuing a unilateral approach to statehood" with serious implications for Israel.

"Palestinian unilateralism is modeled after Kosovo's February 2008 unilateral declaration of independence from Serbia," said a recent paper by Dan Diker of the Jerusalem Centre for Public Affairs.

The EU and the United States recognised the independence of Kosovo without the support of a Security Council resolution. Palestinian leaders now believe "geopolitical conditions are ripe" to follow that path, Diker said.